Global Equity Income outlook: Resilience and recovery amid new trade realities

Ben Lofthouse: Well, it’s been a very eventful few months and I’m pleased to say the markets have recovered and dividend stocks have recovered as well as part of the market recovery. Generally, income stocks have, they’re more defensive and they’ve proved to be more defensive in the sell off.

We have seen a lot of enthusiasm for areas like financial services. So that’s come back very strongly, partly because of the assumption of higher interest rates, which are quite often good. You know, moderately higher interest rates are good for the sector.

Sectors such as healthcare and real estate investment trusts, they’ve been weak. So, combination of the impacts and concerns around tariffs and attempts to reduce pricing in pharmaceuticals has made that sector weak. And it’s a sector that we’ve been trying to reduce exposure to over the last year and a half. And then other sectors such as utilities, telecommunications, well, actually they’re pretty unaffected by tariffs. So, I think that as the market has shifted through the news, you know, it’s gravitated a little bit to sectors that it thinks are, you know, less impacted and, and there’s probably more of those than people really expect.

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In terms of the dividend backdrop, I’m pleased to say the companies have been reporting their dividends and paying them as expected. We haven’t seen any great shock in that area, nothing like, you know, the Covid shock of 2020.

For some sectors, you know, actually parts of the movements recently have been beneficial both in terms of currencies. So, you know, for the weaker dollar actually is quite good for quite a lot of companies, particularly if they’re, they’re outside the US and they’re relying on US debt. But the other areas, areas like financials, you know which are benefiting from the higher interest rates and generally what we’ve seen is a moderation of some of the news recently which misleading people to give maybe lower forecasts and some of the impacted areas, but they’re not significantly lower earnings forecast that we’re getting so far.

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As I said earlier, many, many companies are not particularly impacted by tariffs directly. Most the rest of the world outside the US is still trading with itself without tariffs. So again completes without a large US exposure in whichever sector they’re in are largely unaffected. Sectors that are very domestic such as utilities, telecommunications, financials and even food and beverage areas that are domestic rather than kind of exposed to US, are relatively unaffected by tariffs. So that’s where we’ve been focusing the portfolio. And the other thing is really looking for companies that have got pricing power. This has been a key theme of ours over the last three or four years. Because there is inflation in the world, you quite often end up with, you know, tightness in certain commodity markets or tightness in certain products being produced. So the ability to pass that on is important. So that’s really what we’ve been focusing on the last few years and, and particularly for US stocks, I think that’s going to remain important so that you can pass on some of the pricing impact of tariffs.

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Managing market turbulence is one of those things that really the most important thing is having some form of diversification within the portfolio. If you get too exposed to a particular theme or a particular area, it can be problematic because, by definition, if turbulence comes, it’s often unexpected. In the case of tariffs, that’s exactly the same, you know,

diversified across a number of different sectors and a number of different regions is one of the key advantages of, of running a global fund – that’s what we really focused on in this. The other things that we’ve been focused on where, where is the underlying structural growth. And so it could be that tariffs result in a weaker economic growth. And so far, we’re seeing the structural growth in companies is still in the same places than it has been for the last couple of years.

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And we are very pleased to see a softening in the rhetoric around tariffs since ‘Liberation Day’ earlier in April. So, you know, we’ve seen a number of the tariffs paused. We started to see trade agreements with the likes of here in the UK, and we’re hoping to see some more trade agreements. I think it’s worth remembering that the tariff level is higher than it was. So, we may expect to have more moderate growth. We’re also wary of investment decisions being paused by companies until they get more clarity. These are areas where we see the key risks.

We do see valuations remain attractive international markets and the US market has recovered to pretty much where it was pre the tariffs, but other markets still trade at low valuations versus their history. So that gives us some comfort. And interestingly, we’ve seen in response to some of the changes by the US administration, some companies being more proactive about generating their own growth, looking at ways that they can deregulate, looking at ways that they can stimulate activity within their countries and in areas like defence and infrastructure, like, you know, two of those areas that Europe has not paid very much attention to over the last decade where we’re seeing some more spending. So it would be, you know, very positive to see that continuing. Particularly if we get a little bit of pick up in government spending. So that would make us cautiously optimistic for the next 18 months.